FOR ADVISERS ONLY

Retirement Income Market – FCA Data

Fiona Tait

29 January 2016

Six months into freedom and choice the FCA are continuing to monitor consumer choices in order to identify high risk activities and introduce any necessary changes to regulation. We summarise their latest report.

Pension options

Lump sum withdrawal is still proving to be more popular than regular income. 57% of withdrawals were taken either as UFPLS or a small pot lump sum - and these are in addition to consumers using Flexi-Access Drawdown (FAD) to withdraw lump sums.

It is unfortunate that the FCA has not recognised this in its data requests. It would be useful to see a breakdown of the drawdown group into those withdrawing regular income (in other words as a pension) and those taking lump sums.

Sensible behaviour

Nearly 90% of full withdrawals were from funds worth less than £30,000.

Full withdrawal is more likely to be a suitable choice for funds which could only provide a low level of lifetime income, especially if the customer has other pensions available to provide future income.

Funds of this size will also result in a lower tax charge.

Younger retirees more likely to use UFPLS/drawdown.

The FCA also found that customers accessing their money between 55 and 59 were likely to use UFPLS or drawdown, whereas annuity purchase was most popular among 65-69 year olds. It is possible that drawdown is being used to retain flexibility for the future, and annuity purchase when income needs become more predictable. Later annuity purchase also means a higher annuity rate due to age and increases the chances of an enhanced rate due to health factors.

Highlighted concerns

Over two thirds of GARs were given up by customers looking to withdraw money from their pension.

6% of the accumulated pension funds being used to access funds included a Guaranteed Annuity Rate, and 68% of these were given up by those looking to withdraw money. This is a figure high enough to cause concern however the FCA figures also show that this decision was most prevalent amongst those with the smallest pots, where the income level may not be very high even with a guaranteed rate.

Given also the relatively young age at which UFPLS and drawdown are being used it is likely that some of these consumers would have to wait several years to qualify for their GAR and may have more immediate needs which outweigh the eventual income guarantees.

Nearly a third (27%) of drawdown customers aged 50-59 making withdrawals are taking over 10%.

The most common withdrawal rate from drawdown plans being used to provide income was less than 2% which is likely to be sustainable over the medium to long term, however withdrawal rates varied across age groups.

This may reflect spending patterns in retirement, which are likely to be highest in the active years, but it is also possible that some of these consumers are unaware of the rate of income that can be sustained by their fund, particularly if they haven't taken advice or guidance.

Nearly half (42%) of customers using drawdown did not take financial advice.

The FCA acknowledges that this includes those who withdraw the entire fund (which at least removes the need for ongoing advice) however it remains Royal London's position that income drawdown is a complicated proposition and customers would be strongly recommended to take financial advice.

The (free) Pension Wise figures are even lower, with only 17% having used the service, which may indicate that cost is not the only factor influencing customer behaviour.

Over half (58%) of drawdown customers stay with their existing provider.

This is lower than for annuity customers (64%) and it must be remembered that drawdown plans can still be transferred if they become unsuitable. There would also be little point in going to the expense of taking out a new plan if the full fund is to be immediately withdrawn or if is available as a cost-effective option within the existing accumulation plan.

Conclusion

It is early days but on the whole consumers seem to be using their pension freedoms sensibly. Those cashing out completely tend to be (relatively) younger and be using smaller pension pots which would be unable to provide a significant level of lifetime income.

Key risks remain, particularly the danger of spending too quickly or withdrawing money to purchase inappropriate and possibly bogus investments. These are risks that every pension company, adviser and giver-of-guidance needs do all they can to help their customers to avoid.

Fiona Tait

Pension Specialist

Fiona joined the life and pensions industry in 1989. She is a Fellow of the Personal Finance Society, an Associate of the Chartered Insurance Institute and is currently Vice-President of The Insurance Society of Edinburgh. Fiona specialises in the areas of at retirement planning and pensions and divorce.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London EC3V 0RL.

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